Sale of real estate under VAT - the most important information

Service-Tax

When selling real estate, taxpayers often find it difficult to determine whether, in a given case, such a transaction should be subject to VAT or whether an exemption may be applied. The package of changes introduced as part of SLIM VAT 2 introduced a significant simplification for taxpayers in this respect. In this article, we will explain how to tax the sale of real estate under VAT after the changes.

Sale of real estate and VAT exemption

As a rule, the sale of real estate is subject to VAT, but the provisions of the VAT Act provide for exemptions in strictly defined situations. Pursuant to Art. 43 sec. 1 point 10 of the VAT Act, the supply of buildings, structures or parts thereof is exempt from tax, except when:

  • the delivery is made at or before the first settlement;

  • a period of less than 2 years has elapsed between the first occupancy and the delivery of the building, structure or parts thereof.

In the light of the above-mentioned provision, the key to determining the taxation rules for the delivery of a building is to determine when it was first occupied and what time has elapsed since then. Pursuant to Art. 2 point 14 of the VAT Act, the first settlement is understood as:

  • handing over for use to the first buyer or user

  • or the commencement of private use of buildings, structures or their parts

- after their construction or improvement, if the expenses incurred for the improvement, within the meaning of the provisions on income tax, constituted at least 30% of the initial value.

Example 1.

Mr. Jan is the owner of the building in which the first occupation took place on August 10, 2019. It intends to sell the property in December 2021. Can Mr. Jan take advantage of the VAT exemption or must he tax the VAT transaction if he used the real estate in the taxable activity of his company?

Due to the fact that the period of 2 years has expired from the first settlement (it expired in August 2021), the sale of real estate is statutorily exempt from VAT.

Example 2.

Ms Halina built a building on her own, which she introduced to fixed assets in the value of PLN 1 million and has been using it in business since July 2015. In November 2020, the building was improved to the amount of 450 thousand. zloty. When can Halina sell the building so that she does not have to tax the sale of VAT?

Due to the fact that the expenditure on improving the property exceeded 30% of its initial value, the first occupation took place. In such a situation, Ms Halina, in order to take advantage of the VAT exemption for the sale of real estate, must wait 2 years. Sales without VAT will only be possible in December 2023.

The legislator also provided for the second type of VAT exemption for the sale of real estate, which is included in Art. 43 sec. 1 point 10a of the VAT Act. According to it, the exemption for the sale of buildings, structures or parts thereof may be used if two conditions are met:

  • the seller was not entitled to deduct VAT when purchasing them;

  • the seller did not incur the costs of improving them, for which he was entitled to a VAT deduction, and if he did, they were lower than 30% of the initial value of these objects.

The improvement of fixed assets should be understood in particular as:

  • reconstruction, i.e. change (improvement) of the existing state of fixed assets to another;

  • expansion, i.e. enlargement (extension) of property components, in particular buildings and structures, technological lines, etc .;

  • reconstruction, i.e. replacement of fully or partially used assets;

  • adaptation, i.e. adapting (reworking) an asset to be used for a purpose other than that for which it was originally intended or to give it new functional features;

  • modernization, i.e. modernization of the fixed asset.

However, these rules will not apply to renovation expenses that do not constitute an improvement within the meaning of the income tax regulations. Renovation is aimed at reconstruction, which does not increase the value of the property, and its only task is to restore the current condition.

Example 3.

Mr. Aleksander built the building in 2017, then rented it as part of his business, issuing a monthly VAT invoice. At that time, the first settlement took place within the meaning of the provisions of the VAT Act. In 2020, Mr. Aleksander incurred expenses for the improvement of the building in excess of 30% of its initial value. In 2021, he would like to sell the apartment. Can it benefit from a VAT exemption?

No, because in 2021 the period of 2 years has not passed since the first settlement. When the property was handed over to the tenant, the first occupancy took place. At the time of the improvement of the building, there was another first occupation within the meaning of the provisions of the VAT Act. Consequently, if Mr. Aleksander wants to sell the building in 2021, then this transaction will not benefit from the VAT exemption as it was made within two years of the first occupation (which took place again when the building was improved). The first occupation does not occur at the moment of entering the property into the fixed assets register, if such a building, structure or its part is not actually used by the taxpayer, e.g. it is not rented out.

Example 4.

Ms Emilia incurred expenses for the renovation of the building with an initial value of PLN 500,000 in the amount of PLN 160,000. The renovation was of a reconstruction nature and concerned many places in the property, including roof renovation or painting of rooms. Has there been any improvement in this case and does this interrupt the run of years from the first occupation of real estate entitling to sale without VAT?

No, the above renovation does not result in the loss of the first occupation status. Ms Emilia carried out renovation works, which were not improvement works, if they consisted solely in restoring the original condition of the property. The above-mentioned does not increase the value in use of the building - the value in use of the building has been restored. The first occupation also takes place when the taxpayer begins to use the property for his own needs.

Resignation from the exemption in the delivery of real estate

The taxpayer may resign from the VAT exemption for the delivery of real estate and voluntarily choose to tax the sale transaction.

Before October 1, 2021, for this to be possible, the seller and buyer of the building, structure or parts thereof had to meet two conditions, i.e. both parties to the transaction:

  • were registered as active VAT payers;

  • submitted, prior to the date of delivery of the object, to the head of the tax office competent for the buyer, a consistent statement that they choose to tax the delivery.

If the declaration on voluntary taxation of sales with VAT was not submitted on time, the transaction could not be taxed with VAT if it met the conditions for the exemption by law.

The introduction of changes as part of the SLIM VAT package 2 brought about simplification in this respect. Pursuant to Art. 43 sec. 10 of the VAT Act, the seller may voluntarily tax the sale of real estate provided that two criteria are still met, i.e. both the seller and the buyer:

  • are registered as active VAT payers;

  • submit a declaration of voluntary choice of taxation of the transaction.

This declaration is submitted under the old rules, i.e. before the date of delivery of the building, structure or parts thereof to the head of the tax office competent for the buyer or directly in the notarial deed at the time of sale of the real estate. SLIM VAT 2 made it possible to submit a declaration on the voluntary choice of taxation of the sale of buildings, structures or their parts in a notarial deed, which is concluded in connection with the delivery of these objects.

The submitted declaration must contain:

  • names and surnames or the name, addresses and tax identification numbers of the seller and the buyer;

  • the planned date of concluding the contract for the delivery of the building, structure or part thereof - if the declaration is submitted before the date of signing the notarial deed to the head of the tax office competent for the buyer;

  • address of the building, structure or parts thereof.

In the event of resignation from the VAT exemption, the delivery of buildings, structures or parts thereof is subject to 8% VAT (social housing) or 23% VAT (to others).

Sale of real estate without VAT and obligatory VAT correction

If there is a change in the purpose of a fixed asset from the purchase or construction of which VAT has been deducted, the entrepreneur should verify whether he does not have to make a VAT adjustment for the acquisition of fixed assets. This is due to Art. 91 paragraph. 7a of the VAT Act, according to which if:

  • originally, the taxpayer was entitled to deduct VAT on the purchase or construction of real estate and

  • he or she meets the conditions for a VAT exemption on sale and will exercise this right, and

  • the value of the property exceeds PLN 15,000 and

  • the period of 10 years has not elapsed (the so-called correction period) from the date of bringing the property into the fixed assets

- the taxpayer is obliged to correct the previously deducted VAT in the JPK_V7 file submitted for the first tax period of the year following the tax year for which the correction is made. If the value of the building, structure or parts thereof sold does not exceed PLN 15,000, the correction period is 1 year. The sale of real estate after the time when the taxpayer intends to use the VAT exemption for sale does not result in the obligation to correct the VAT.

Example 5.

Ms Danuta is an active VAT taxpayer. She purchased a real estate for PLN 1,230,000 gross in June 2018 and deducted VAT, introducing the real estate into fixed assets. The building is the seat of Mrs. Danuta's company. In 2021, the entrepreneur wants to sell this property and take advantage of the VAT exemption. What accounting obligations does it have to fulfill to make this possible?

The first step is to establish whether Ms Danucie is entitled to a VAT exemption. The building was put into use in June 2018 (first occupancy took place). Ms Danuta did not incur any expenses for its improvement. Sales in 2021 will be eligible for VAT exemption, as two years have elapsed since the first occupation, already in 2020.

After the sale of the property, it will be necessary to make an adjustment to the acquisition of fixed assets, as less than 10 years have passed from the moment of purchase. The building was acquired in 2018 and sold in 2021. This means that 6 years remain until the end of the correction period. In the declaration part JPK_V7 for January, every year from 2022 to 2027, Ms. Danuta is obliged to show the calculated value of the correction in the amount of PLN 23,000 for a given year.

Calculations:

VAT deducted on the purchase of real estate - PLN 230,000.

VAT tax for each year from the adjustment period - PLN 23,000 (230,000/10). The adjustment for the purchase of fixed assets is shown in the JPK_V7 file in the declaration part marked as "WEW".

How to settle the sale of real estate in fixed assets?

In order to issue an invoice for the sale of a fixed asset in the wFirma.pl system, go to the tab: RECORDS »FIXED ASSETS, where you must select" real estate sold "on the list and select the SALE option from the top menu. In the invoice issue window, select the VAT rate from the list (23% or 8%) and complete the required fields.

The invoice issued in this way will be entered in the column 8. KPiR - "Other revenues" and in the sales VAT register.